On Saturday, the Financial Services Authority will mark an important milestone. It will be three months to the day since the regulator said it would require hedge funds and other borrowers of company stock to disclose their positions.

Since then, both the regulator and hedge funds have been criticised by opponents of short selling on one hand and by those complaining about overburdensome regulation on the other.

Yet investors who form an integral part of this market – who lend stock to hedge funds – have faced less public scrutiny. Information on who is lending stocks of which firm is available, but is harder to come by, and some data providers charge for it.

Stock lending is big business. At the end of last year, UK insurer Prudential, for example, had £17bn (€21.4bn) out on loan while the Railways Pension Scheme, one of the UK’s largest funds, more than doubled its programme last year to £723m.

Some UK companies, such as retailers HMV or J Sainsbury, have more than a quarter of their market capitalisations out on loan, according to Data Explorers.

Bill Crist, former trustee board president of Calpers, one of the biggest pension funds in the US, believes pension schemes and insurers should disclose their securities-lending activity to companies concerned, something they are not presently required to do.

He said: “Then company management can come to the investor and speak to them about recalling the stock if, for example, there is a company general meeting.”

She said: “A lot of stock lending, particularly in some continental European markets, is done for tax reasons. It can be tax advantageous for some investors to receive dividend payments in certain jurisdictions but not in others, so shares are lent between them with the intent of receiving the dividend.

“But, at some companies, the general meeting at which shareholders must vote occurs at the same time as the dividend payment. This means if holders lend out their shares, they miss the opportunity to vote. Disclosure could help the company directors argue the case for voting.”

Disclosure would also not necessarily involve extra effort on behalf of the shareholder, since the process would likely become another administrative task performed by the custodial bank.

Not everyone is convinced, however. Many companies that already have shares lent out and short sold have an idea who is lending, particularly if their share register consists of a small number of big institutions with which they have regular dialogue.

He said: “Shareholders own the company. They should not be held accountable to management, that is the wrong way round. The key thing is for shareholders to decide whether or not they wish to vote and therefore to recall lent shares, and for lending agents to act on their instructions.”
Ed Oliver, a consultant with securities lending advisory firm Spitalfields Advisors, said shareholders always had the right to recall their shares.

He said the increased climate of regulatory scrutiny of short selling, with regulators in the US and Australia also examining the issue, was not always positive.

He said: “In general, more transparency is a good thing, but changes should not be brought in the way that the FSA did it, without any consultation.”